Liquid funds are great for those individuals who wish to meet short-term financial objectives. In case you wish to build a corpus for an emergency fund, which should be a priority for everyone, the best liquid funds can help you grow wealth. Liquid funds invest for the short term, primarily in money market instruments like certificates of deposits, government securities, commercial paper, treasury bills, etc.
Schemes of liquid funds do not have any lock-in, hence their funds are redeemable at any time, depending on an investor’s requirements. Furthermore, the best liquid funds do not come with any exit load, provided six days have passed from the date of their purchase. When investors wish to redeem units in a liquid fund, fund houses make capital available on the very next day. Therefore, the best liquid funds in India have features that appeal to a gamut of investors.
Features of the Best Liquid Funds
Once you know what the best liquid funds can offer you, you will know how to select the funds on offer in India today. The features, translating to advantages, are highlighted below:
- The Ratio of Risk/Reward – The leading liquid mutual funds in India today are based on the value of the underlying money market instruments and debt that funds invest in. Nonetheless, as the prices of these securities (short-term securities) don’t fluctuate as much as those of mid-term securities, or bonds invested for longer terms, these funds offer a great deal of stability compared with other schemes that invest in debt.
- Allocation of Assets – As per the rules laid down by SEBI (Securities and Exchange Board of India), the best liquid funds are required to invest in money market instruments and debt, and have a maximum period of maturity of 91 days.
- Taxation – In terms of taxability, liquid funds are taxable depending on the period of their holding. In the event that liquid funds are redeemed before three years of holding them, STGC (short-term capital gains) are added to an investor’s income and taxes as per the income bracket of investors apply. If investors redeem units in funds after a holding period of three years, a long-term capital gains tax is levied at 20% (with indexation).
The Suitability of Liquid Funds
The best liquid funds in India in 2022 suit individuals who want short-term returns. Such schemes have the power to generate higher returns than investors would achieve by parking their capital in a regular bank account. Liquid mutual funds are also great investments if you wish to build a corpus for any contingency. With all the uncertainty in the world, the main priority in anyone’s investment plan should be the growth of wealth for an emergency fund. The best liquid funds target capital preservation as a key focus feature, and the generation of steady returns at the same time. The flexibility of top liquid funds is a prime draw for investors who have the ability to redeem units as and when required.
Considerations in Liquid Funds
With all the advantages you get in liquid funds, there are always considerations to dwell on before you plunge into investment. Think of the following:
- A Fund’s Past Performance – Consider the fund’s performance in the past. It is likely to do well, as the best liquid funds do, in the future if it has a good historical performance. The credibility and the previous performance of the fund manager is something to think about too.
- An Investor’s Traits – If you are an investor who is interested in liquid funds, you may think that these pose the least risk for you. However, any funds do not come without the potential for risk. There may be some risk involved with credit and interest rates. You should also take note of the fact that liquid funds do not let you grow wealth for long-term needs. You must match your financial goals with the aim of certain schemes.
- The Expense Ratio (ER) – High expense ratios may make the best liquid funds earn less for the investor. You must choose a liquid fund with a moderately low ER.
A Close Look at the Best Liquid Funds in 2022
Here is a view of the best liquid funds to think of in 2022:
- Quant Liquid Direct Plan-Growth
With 5.92% annual returns for the past five years, this liquid fund belongs in the debt category of mutual funds. With an AUM of Rs. 727 crores, this liquid fund has a 1-year returns status of 4.3%
- IDBI Liquid Fund Direct-Growth
One of the best liquid funds on the market today, with an AUM of Rs. 602 crores, this fund has had 1-year returns of 3.9%. You can invest in this through a SIP or a lump sum.
- Mahindra Manulife Liquid Fund Direct-Growth
This fund has an AUM amounting to Rs. 923 crore and 1-year returns of 3.9%.
- Edelweiss Liquid Direct Growth
In the last five years, returns for this fund are at 5.44%, and for 1 year, at 3.8%. This is a good liquid fund, with AUM equal to Rs. 1,498 crores.
- Baroda BNP Paribas Liquid Fund Growth
With AUM amounting to Rs. 6,654 crores, the 1-year returns of this fund are pegged at 3.9%.
The Best Liquid Funds Today
In the commonest of terms, liquid funds are debt mutual funds and match the requirements of some investors. Since the investment duration is extremely short, you get liquidity and funds for meeting your short-term aims. In choosing the best of these, you can fulfill your needs to grow a good corpus for emergencies.